VTech Announces FY2018 Annual Results

“The financial year 2018 saw revenue at VTech reach another record high, mainly driven by strong growth in the Asia Pacific region. Profit was also higher, owing to increased revenue and the absence of one-off costs associated with the integration of LeapFrog.

“The financial year 2018 saw revenue at VTech reach another record high, mainly driven by strong growth in the Asia Pacific region. Profit was also higher, owing to increased revenue and the absence of one-off costs associated with the integration of LeapFrog. The Group remains well-positioned for further growth,” said Mr Allan Wong, Chairman and Group CEO of VTech Holdings Limited.

Results and Dividend

Group revenue for the year ended 31 March 2018 increased by 2.4% to US$2,130.1 million, driven by higher sales in North America and Asia Pacific. Growth of electronic learning products (ELPs) was negatively impacted by Toys”R”Us, as it filed for bankruptcy protection in the US and Canada in September 2017, followed by the liquidation of its US and UK businesses in early 2018.

Profit attributable to shareholders of the Company increased by 15.3% to US$206.3 million. The rise in profit was mainly due to higher revenue, as well as the absence of the one-off costs associated with the integration of LeapFrog Enterprises, Inc. (LeapFrog) that were taken in the previous financial year.

Basic earnings per share rose by 15.1% to US82.1 cents, compared to US71.3 cents in the previous financial year.

The Board of Directors has proposed a final dividend of US63.0 cents per ordinary share, providing a full-year dividend of US80.0 cents per ordinary share, an increase from the US70.0 cents declared in the previous financial year. This represents a reduction in the dividend payout ratio from 98.2% to 97.5%.

Costs

The gross profit margin of the Group fell from 33.2% in the financial year 2017 to 33.0% in the financial year 2018. This was mainly due to higher cost of materials, which offset a positive currency impact and productivity gains. In the financial year 2018, the Group successfully brought most of the products of LeapFrog and Snom Technology GmbH (Snom) in-house for manufacture.

VTech Business

The financial year 2018 was challenging for the Group’s ELPs business. Toys”R”Us, the major toy retailer and one of the Group’s top five customers, filed for bankruptcy protection in the US and Canada in September 2017, followed by the liquidation of its US and UK businesses in early 2018. These developments resulted in a significant reduction of sales to the retailer, affecting growth primarily in North America and Europe. VTech’s sales up to the date of the bankruptcy protection filing were covered by credit insurance. Since then, VTech’s management has exercised prudence and discipline in securing payment for goods supplied to Toys”R”Us. Consequently, no material bad debt was incurred as a result of the liquidation. Despite this challenge, VTech was able to grow its ELPs revenue overall, buoyed by a strong performance in Asia Pacific.

Standalone and platform products both achieved sales increases in the financial year 2018. In standalone products, further progress was made in growing LeapFrog’s standalone products business, as more new standalone toys were launched under the brand. Sales of VTech standalone products also rose, supported by higher sales of infant and preschool products, as well as Kidizoom® Camera. This offset the sales decline of the Go! Go! Smart/Toot-Toot family of products. Growth in platform products was primarily driven by VTech platform products, with the Kidizoom Smartwatch range, KidiBuzz™/KidiCom™ MAX and Touch and Learn Activity Desk Deluxe™ all recording sales increases. LeapFrog reading systems, including LeapStart®/MagiBook™[1] and LeapReader™, also registered sales increases. The percentage shares from standalone and platform products within total ELPs revenue remained unchanged during the financial year 2018, at 77% and 23% respectively.

Sales of telecommunication (TEL) products in the financial year 2018 were lower than expected. This was mainly due to a higher-than-expected decline in sales of residential phones in the second half, which offset the growth in commercial phones and other telecommunication products.

Sales of residential phones were down by 16.8% year-on-year. This was mainly attributable to the weaker-than-expected fixed-line telephone market, compounded by the tight global supply of materials in the second half. Sales of commercial phones and other telecommunication products continued to trend higher, however, rising by 15.0% year-on-year. VoIP (Voice over Internet Protocol) phones performed particularly well, benefitting from the full-year sales contribution of Snom and increased sales of VTech branded VoIP phones. VTech baby monitors also maintained their momentum. According to The NPD Group, Inc. (NPD), VTech was the number one baby monitor brand by dollar sales in the US during the financial year 2018[2]. Cordless headsets, integrated access devices (IADs), CAT-iq (Cordless Advanced Technology – internet and quality) handsets, hotel phones and conference phones all posted sales increases. The continued growth of commercial phones and other telecommunication products saw their share of total TEL products revenue rise from 34% in the previous financial year to 42% in the financial year 2018.

VTech’s contract manufacturing services (CMS) achieved their sixteenth consecutive year of growth in the financial year 2018. Professional audio equipment, industrial products, medical and health products and solid-state lighting recorded sales increases. This offset a decline in switching mode power supplies following the change of ownership of a customer, which saw production taken back in-house. The full-year sales contribution of the high precision metal parts business added to growth. Sales of hearables and communication products held steady, while home appliances saw a slight decline in sales. During the financial year, good progress was made on migrating the business towards “Industry 4.0”, in which machines are augmented with web connectivity and connected to a system that can visualise the entire production chain and make autonomous decisions.

The continued outperformance of CMS testifies to its strong reputation, deep manufacturing know-how, stable management and excellent services. It also demonstrates the success of the business strategies of customer focus and commitment to utilising state-of-the-art manufacturing technology.

Segment Results

North America

Group revenue in North America increased by 2.4% to US$1,041.0 million in the financial year 2018, as higher sales of ELPs and CMS offset lower sales of TEL products. North America was VTech’s largest market, accounting for 48.9% of Group revenue.

ELPs revenue in North America rose by 0.7% to US$458.2 million. Growth was negatively impacted by the reduction of shipments to Toys”R”Us following its filing for bankruptcy protection in September 2017. In the calendar year 2017, VTech maintained its position as the number one manufacturer of electronic learning toys from infancy through toddler and preschool in the US[3].

Standalone products posted flat sales. Sales of LeapFrog standalone products grew, as the Group launched more new products under the brand. This strategy saw success in the financial year 2018, with both infant and preschool products recording higher sales. Sales of VTech standalone products decreased, mainly owing to the weaker performance of the Go! Go! Smart family of products.

Sales of platform products were higher, driven by increased sales of VTech platform products including the Kidizoom Smartwatch range, KidiBuzz and Touch and Learn Activity Desk Deluxe. Sales of LeapFrog platform products declined, owing to a decrease in sales of children’s educational tablets. Sales of LeapFrog reading systems, including LeapStart and LeapReader, remained flat. In August 2017, LeapFrog Academy™ was launched in the major English-speaking countries and subscriptions have been growing steadily.

The Group’s ELPs were included in major holiday toy lists during the financial year 2018. Pop-a-Balls™ Drop & Pop Ball Pit™ was named to Walmart’s “Chosen by Kids” Top Toys List. Scoop & Learn Ice Cream Cart™ was featured in The Toy Insider’s “Hot 20” list, alongside Go! Go! Smart Wheels® Race & Play Adventure Park™. Four VTech and LeapFrog ELPs were included in the “Top 100 Holiday Toys” list at Amazon.com. Four VTech products were also finalists in the 2018 Toy of the Year (TOTY) awards from The Toy Association, Inc. GearZooz™ Roll & Roar Animal Train™ and Pop-a-Balls Push & Pop Bulldozer™ were finalists in the infant/toddler category. Storytime Rhymes Sheep™ was a finalist in the plush category and Go! Go! Smart Wheels Race & Play Adventure Park was a finalist in the playset category.

TEL products revenue in North America decreased by 10.6% to US$327.0 million. Although sales of commercial phones and other telecommunication products continued to grow, this was insufficient to offset a further decline in sales of residential phones.

Rising sales of commercial phones and other telecommunication products were driven mainly by higher sales of headsets and VoIP phones. In headsets, the Bluetooth models specially designed for the professional trucker market maintained strong sales momentum. New VTech branded VoIP phones based on the Snom technology platform helped drive the sales increase. Although sales of baby monitors declined due to customer order delay, the VTech branded range continued to gain market share. According to NPD, VTech is the number one baby monitor brand by dollar sales in the US[4]. Both hotel phones and VTech’s line of conference phones, ErisStation®, saw steady growth.

In contrast, the drop in sales of residential phones reflected a higher-than-expected decline in the fixed-line telephone market. Nonetheless, VTech maintains its leadership position in the US residential phones market[5].

CMS revenue in North America rose by 30.8% to US$255.8 million, with growth across the board. Professional audio equipment recorded a significant sales increase, driven by strong demand for the new active speakers launched by an existing customer, as well as more orders from another customer which had worked through excess inventory. The transfer of production to VTech by an existing customer boosted sales of solid-state lighting. Industrial products benefitted from new orders for printed circuit board assembly for industrial printers, electronic locks and note counting devices. Sales of home appliances rose as a customer expanded its market share in the US. Sales of communication products declined, however, as the customer’s product line reached the end of its life cycle.

Europe

Group revenue in Europe fell by 2.2% to US$849.1 million in the financial year 2018, as higher sales of ELPs and TEL products were unable to offset lower sales of CMS. Europe remained VTech’s second largest market, accounting for 39.9% of Group revenue.

ELPs revenue in Europe showed a 1.6% increase to US$363.2 million in the financial year 2018, despite the negative impact from Toys”R”Us. Geographically, Germany, Spain and the Netherlands recorded growth while France and the UK maintained stable sales. In the calendar year 2017, VTech strengthened its position as the number one infant and toddler toy manufacturer in France, the UK, Germany and Spain[6].

Standalone products achieved slightly higher sales, with LeapFrog standalone products posting growth. This was driven by new product launches, with both the infant and preschool categories seeing increases. Sales of VTech standalone products were stable. Sales of infant and preschool products, Kidizoom cameras and the Kidi line were higher, compensating for lower sales of the Toot-Toot family of products and Kidizoom Action Cam. Sales of the Little Love® line were steady.

Platform product sales in Europe increased during the financial year 2018. Sales of VTech platform products were higher. The second generation Kidizoom Smartwatch DX continued to perform well and sales momentum was augmented by new Star Wars themed Kidizoom Smartwatches. KidiCom MAX, the new version of DigiGo® that was launched in October 2017, also delivered a good performance. Sales of LeapFrog platform products posted growth, as an updated version of LeapStart/MagiBook[7] was introduced in most of the major European countries, offsetting a decline in children’s educational tablets.

The Group’s ELPs garnered many leading industry awards in the UK and continental Europe. LeapStart and Chase Me Casey were chosen as “Dream Toys 2017 – Toys for Christmas 2017 (Category of Top of the Tots)” by the UK Toy Retailers Association. In France, VTech won four “2017 Grand Prix du Jouet” awards from La Revue du Jouet magazine, the highest number granted to any manufacturer, with Little Love Puppy Pal gaining the top “Toy of the Year 2017” award. Little Love Puppy Pal and Kidizoom Flix® were both named “Toy of the Year 2017” by the Belgian Federation of Toys. Kidizoom Flix also gained the “Toy of the Year 2017” award from the Dutch Toy Association.

Revenue from TEL products in Europe increased by 2.9% to US$132.7 million, as higher sales of commercial phones and other telecommunication products offset lower sales of residential phones. Growth in commercial phones and other telecommunication products was driven by a full-year sales contribution from Snom, which recorded strong growth in its existing product lines. A new, high-end VolP phone from Snom began shipping to Europe in January 2018, featuring a high-resolution colour display, 24 programmable keys, a USB port and Bluetooth integration. This has been very well-received by the market and added incrementally to sales growth. IADs achieved good growth as the Group added new customers, while sales of CAT-iq handsets also rose as the Group increased promotions with its telecom operator customers. Baby monitors and hotel phones maintained stable sales. Residential phones saw a sales decline as the fixed-line telephone market continued to contract.

CMS revenue in Europe fell by 7.4% to US$353.2 million, mainly due to the decline in sales of switching mode power supplies. Hearables, home appliances and medical and health products all experienced sales decreases, offsetting growth in professional audio equipment, industrial and communication products. Switching mode power supplies were affected by a change in ownership, which led a customer to move production back in-house. Sales of hearables fell as customers faced keen competition in the headset market. Home appliances sales declined as a customer reduced orders. In medical and health products, growth in hearing aids was offset by declines in hair removal products. Professional audio equipment grew as orders from two major customers increased, while industrial products continued to benefit from rising sales of smart meters for the UK market. Communication products also saw strong growth, driven by increased orders for VoIP phones and the addition of a new customer for Wi-Fi routers.

Asia Pacific

Group revenue in Asia Pacific increased by 32.6% to US$197.1 million in the financial year 2018, with higher sales in all three product lines. Asia Pacific represented 9.2% of Group revenue.

Revenue from ELPs in Asia Pacific rose by 36.4% to US$71.9 million, with growth led by Australia and mainland China. In Australia, increased marketing efforts and broader listings contributed to higher sales of both VTech and LeapFrog branded products. The VTech branded First Steps™Baby Walker was named “Infant/Preschool Toy of the Year 2018” by the Australian Toy Association. Mainland China grew as the Group continued to expand sales channels, step up marketing efforts and roll out new products. Tapping into the opportunity created by the relaxation of the country’s one-child policy, more infant products were launched, which generated significantly higher sales of this category. The fifth generation of Switch & Go Dinos™, which has been specifically designed for the Chinese market, was launched and sales were strong. Increased sales of LeapFrog branded products in other Asia Pacific markets also contributed to overall growth.

TEL products revenue in Asia Pacific increased by 16.0% to US$44.2 million. Japan, Hong Kong and Korea led the growth. In Japan, VTech increased sales of cordless phones to existing customers, while in Hong Kong, the Group supplied telecommunication devices to a leading local broadband service provider, driving sales of IADs and CAT-iq handsets. During the financial year 2018, the Group began shipping cordless phones and VoIP phones to a new customer in South Korea, driving a sales increase in the country. Sales in Australia saw a decline despite increased sales of baby monitors, which were insufficient to offset lower sales of residential phones.

CMS revenue in Asia Pacific grew by 40.1% to US$81.0 million. This was attributable to a full-year sales contribution from the high precision metal parts business and higher sales in most product categories. VTech’s technical know-how in miniaturisation has established it in the field of hearables and orders of this product category rose strongly. Marine radios benefitted from more orders for a new digital version, supporting higher sales of communication products. Medical and health products were boosted by further growth in orders for diagnostic ultrasound systems from a Japanese customer. Sales of solid-state lighting and home appliances, however, recorded declines as customers faced keen competition.

Other Regions

Group revenue in Other Regions, namely Latin America, the Middle East and Africa, fell by 8.1% to US$42.9 million in the financial year 2018. Lower sales of TEL products offset higher sales of ELPs and CMS. Other Regions accounted for 2.0% of Group revenue.

ELPs revenue in Other Regions increased by 5.3% to US$14.0 million, as higher sales in the Middle East and Latin America compensated for lower sales in Africa.

TEL products revenue in Other Regions declined by 14.7% to US$27.8 million. The decline was attributable to lower sales in Latin America and Middle East, offsetting a small growth in Africa.

CMS revenue in Other Regions was US$1.1 million in the financial year 2018, as compared to US$0.8 million in the previous financial year.

Outlook

Group revenue is expected to rise in the financial year 2019. TEL products are anticipated to return to growth, while CMS sales are forecast to increase. ELPs revenue is more difficult to gauge, as in the short run sales in North America and Europe will be negatively impacted by the liquidation of Toys”R”Us.

The uncertainty of ELPs sales as well as foreign exchange movements makes the trend in gross margin difficult to predict. Raw material and direct labour costs will be higher, while the global supply of materials will continue to be tight in the financial year 2019.

Furthermore, there is an ongoing trade conflict between the US and mainland China. Thus far, the target list of announced products potentially subject to punitive tariffs does not include VTech product categories. However, further deterioration of the trade relationship may affect the Group’s results.

ELPs revenue in the financial year 2019 will be affected by the Toys”R”Us liquidation, although management believes the bulk of the sales lost will eventually be taken up by existing customers. The longer term prospects for the Group’s ELPs remain positive, however. In North America and Europe, the Group plans to strengthen its market position by launching new products. Standalone products will see the expansion of the VTech baby, infant and preschool lines, as well as LeapFrog branded learning toys. In platform products, during the financial year Kidizoom Smartwatch DX2 will be rolled out to most European markets, while the new LeapStart 3D will be launched in the US and UK, featuring an interactive 3D-like holographic display and touch-and-talk games. The LeapStart library will also expand with new titles. In Asia Pacific, growth is expected to remain robust.

TEL products revenue is forecast to return to growth, as the sales increase of commercial phones and other telecommunication products is expected to more than compensate for the decline in residential phones. Commercial phones and headsets will lead the way, driven by new product launches, increased sales channels and geographic expansion. The latest VTech and Snom VoIP phones have been extremely well-received. The good momentum in headsets will continue, supported by new product launches and geographic expansion to Europe and Australia. VTech will continue to drive innovation in its successful line of baby monitors by introducing relevant new features. Sales of CAT-iq handsets will also increase, as the Group launches new products in Germany in June and begins supplying the products to a UK telecom operator in the third quarter of the financial year. In contrast to the growth in commercial phones and other telecommunication products, sales of residential phones will decline further, as the fixed-line telephone market continues to contract.

CMS is also poised for further growth. Sales will increase across the board, driven by the business expansion of existing customers and VTech’s ability to gain additional business by offering customers more design support.

In April 2018, VTech signed an agreement with Pioneer Corporation under which VTech will acquire a manufacturing facility in Malaysia owned by Pioneer Technology (Malaysia) Sdn Bhd, a subsidiary of the Japanese company. The acquisition includes its fixed assets and business in manufacturing high performance audio equipment tailored for DJs, producers and artists. This will strengthen CMS’ leading position as a manufacturer of professional audio equipment and expand VTech’s global footprint, enhancing CMS’ ability to meet customers’ needs in the years ahead. This acquisition, plus the opening of a new factory building in the current manufacturing facilities in Dongguan, mainland China, will add almost 50% to the production capacity of CMS.

“VTech’s product innovation and operational excellence have given it market-leading positions in a number of areas. It continues to gain market share and expand geographically, while maintaining a strong financial position. Alongside its commitment to sustainability, VTech will continue to explore every avenue of growth, generating higher returns for shareholders,” said Mr Wong.

[1] LeapStart is sold in the UK under the LeapFrog brand but in the rest of Europe is sold under the VTech brand as MagiBook

[7] LeapStart is sold in the UK under the LeapFrog brand but in the rest of Europe is sold under the VTech brand as MagiBook

About VTech

VTech is the global leader in electronic learning products from infancy through toddler and preschool and the world’s largest manufacturer of cordless phones. It also provides highly sought-after contract manufacturing services. Since its establishment in 1976, VTech has been a pioneer in the electronic learning toy category. With advanced educational expertise and cutting-edge innovation, VTech products provide fun and learning to children around the world. Leveraging decades of success in cordless telephony, VTech’s diverse collection of telecommunication products elevates both home and business users’ experience through the latest in technology and design. As one of the world’s leading electronic manufacturing service providers, VTech offers world-class, full turnkey services to customers in a number of product categories. The Group’s mission is to design, manufacture and supply innovative and high quality products in a manner that minimises any impact on the environment, while creating sustainable value for its stakeholders and the community.